Smart Risk Taking

A strong entrepreneur doesn’t just make decisions on a whim, but they have the ability to quickly and carefully process the information needed to make a decision. Something that I do is play out what ifs on a piece of paper. Not only do I evaluate the rewards which will flow from a successful conclusion but I also play out scenarios for where things go wrong. I want to know that we can develop reasonable direction changes if, ‘A,’ ‘B’, ‘C’ or ‘D’ don’t go according to plan.

It is very important that we consider options and exit strategies when we process through a risk. Many times this part of the process lets us know if this is a risk we can afford to take or if the risk is far greater than we initially thought.

The goal is to minimize any risk we take by being prepared. Murphy’s Law says: “Anything that can go wrong, will go wrong.” My experiences tell me not only that but also: “Anything that can go wrong, will go wrong at the worst possible moment.” Those that spend their time thinking through these worst case scenarios and preparing for them, greatly increase their odds of success.

Every journey has a storm or storms to pass through and those who have brought their rain gear will have a much easier time of weathering it than those who only packed shorts and t-shirts.

One of the scariest things we are responsible for is being the risk takers in our businesses. However we can eliminate this fear by escalating the odds of success in our favor. What this means is we need to take the right risks for the right reasons and these risks must match up with our goals and objectives. To do this we must understand the different types of risks.

I’ve laid them out into the following five categories:

Risks that can be avoided simply and completely. The decision doesn’t even need to be taken.

Unnecessary risks. Acting without sufficient information.

Risks that you can afford to take because the cost of failure is low.

Risks you can’t afford to take because the consequences of failing would be too enormous.

Risks you cannot afford not to take. Failure may be costly but doing nothing is just as or even more costly.

Risk #1

Risks that can be avoided simply and completely. The decision doesn’t even need to be taken.

The first one seems silly to even consider a risk but I’m surprised how many people still take these. Almost every single time it comes down to the person being new to that situation. If everyone is being honest here we’ve all taken these types of risks and quickly learned why they should be avoided. We can all think of risks that fall into this category based on our life’s experiences.

None of us would stick our hand in a boiling pot of water to get the egg out. Our experiences tell us that’s a bad idea because it is going to cause intense pain. This is a risk we can simply avoid by cooling the water in the pot or using a spoon in place of our hand.

Risk #2

Unnecessary risks. Acting without sufficient information.

Unnecessary risks are slightly more complicated than the first group because there is more than just a rookie error involved here. This is where you take a risk based solely upon the rewards you expect to receive but do not consider any other information. The reward alone isn’t sufficient information to work from.

As I stated earlier, many times the decision on whether this is a smart risk to take or not lies within the “what if” scenarios.

A prime example of this in internet marketing is something we call ‘slot machine marketing.’ This is where the marketer is getting you only to focus on the potential reward by making their product seem like a dream come true. However if we took just 20 minutes to evaluate their opportunities, we would find, almost always, that these fall into category number four – those risks you simply cannot afford to take.

This ‘slot machine marketing’ falls into the category of risks you cannot afford to take, because just like real slot machines, these opportunities are set up for you to lose in the long-term. Yes, on occasion, somebody may indeed hit the jackpot but would you consider it a smart risk to play slot machines for a living?

Risk #3

Risks that you can afford to take because the cost of failure is low.

This next risk is a tricky one unless we define the word ‘afford.’ When I say ‘afford’ I don’t just mean the financial aspect of taking this particular risk. You must remember that risks are not just financial but can include other resources such as our time, which to me is far more valuable than gold.

We also have to make sure that the risk we are taking does not conflict with our goals and objectives so the word ‘afford’ in this statement includes money, time, people and direction.

Can we afford to go slightly off our main objectives path?

A real life example of a risk my company recently took that fits this category was the purchase of an existing website. After we went through the process of ‘what ifs’ we determined that failure was very low and even if we failed the resource cost was something we could easily afford.

For us, this was a risk where we could afford to fail because failure would not have deflected us from the path we had laid out to achieve our goals. Actually this risk fit in very nicely with our mission statement so making the purchase was a smart risk to take.

Risk #4

Risks you can’t afford to take because the consequences of failing would be too enormous.

Personally category four – risks you cannot afford to take – is the very reason why we process through information. I want to avoid taking these risks at all costs. Logically none of us want to take a risk so great that failure would destroy our business. I don’t care what success in this situation would give me because I’m not putting all my money on black if, by chance, it falls on red and my family is left homeless.

With that said, not everyone defines enormous the same way. Maybe a particular risk is too great for you to take, but for someone else they can afford to take it. This is why we are always trying to place ourselves in better positions.

Eventually we want to be the person who can afford to take risks that others can’t and this is the very reason I teach the plus one, slow grow method. Just because a risk is too great today doesn’t mean that the same risk will always be that way for you.

Risk #5

Risks you cannot afford not to take. Failure may be costly but doing nothing is just as or even more costly.

Lastly we have a double negative for all my grammar fans – risks you cannot afford not to take. In this situation, failing might be costly but standing still could be just as costly or even more so.

Let me paint a quick picture to put this one into focus. You are the owner of AdKreator, a market leader for do-it-yourself advertising design. A large portion of your income is from members paying you a monthly fee to use your service. Recently you’ve heard about a group developing some new technology that is easier to use and will be cheaper to provide.

You know that simply ignoring this new technology could wipe out your market share. You also know that going back to the drawing board with AdKreator is a huge risk, but it is one that you must take because this new technology is going to make you obsolete if you stand still and do nothing.

This very situation played itself out when I brought AdKreator to the market. Those who had similar products with older technology decided that doing nothing was better than updating. Today those sites either do not exist or have very small market shares.

I wrote this down in a notebook to never forget this lesson so that it would never happen to me. Maybe those sites would have failed either way but they would have greatly increased their odds of long-term success by taking this risk.

Knowledge is power in risk taking!

Arming yourself with knowledge so you can quickly process through risks is a very powerful skill set for a leader. I say quickly because I don’t want you to get analysis paralysis. We want to take the right risks as often as we can but we also have to be aware of our momentum.

Success is built on momentum so no matter what we have chosen, if committed to it wholeheartedly, momentum is generated.

Learn to process this information in a timely manner so you continue on with your success.

Related

3 thoughts to “Smart Risk Taking”

I love this breakdown Justin – spot on. So, how do we seek out No. 5’s on a regular basis and avoid or discard Numbers 1 – 4? What I like is it seems like you move through the Numbers 1 – 4 quickly so you can then get to the Number 5s and spend your time there. Thanks!

Thanks for your comment Kent. Personally #5 scares me because it puts us in situations we probably don’t want to be. Personally I’m always on the lookout for #3 but this all has to do with one’s perspective on things. One size does not fit all. What is good for me may not be good for you and vice versa.

Post navigation

Let’s Connect!

Subscribe For Your Chance To Win...A Book That Could Change Your Life!

Each month we do a book review and give away a copy to one lucky reader...It could be you! Subscribe now to get updated on all the awesome content at Plus 1 and be entered to win our book of the month...